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Quebec publishes draft regulation on cap-and-trade system

In July 2010, the Western Climate Initiative (WCI), of which Quebec is a partner, published detailed operational rules for a cap-and-trade system for greenhouse gas (GHG) allowances with a view to setting up a North American regional carbon market. According to these rules, as a first step, all partner states and provinces that will participate in the WCI North American regional carbon market must adopt regulations to implement a GHG cap-and-trade system in their respective jurisdictions. Then, following the signing of interprovincial and international recognition agreements and the adoption of the required regulatory amendments, individual WCI partner systems will be linked to officially create the regional carbon market.

To meet its commitment to the WCI, the Government of Quebec published its eagerly awaited draft regulation1 setting out the rules for operation of a cap-and-trade system under s 46.5 of the Quebec Environment Quality Act2 on July 7, 2011. Although participation in the system by other WCI partner states and provinces is anticipated to be low, the Government of Quebec is also considering moving ahead with implementation of its cap-and-trade system.

Who does the regulation apply to?

The regulation applies to the largest GHG emitters, principally in the areas of mining and quarrying; oil and natural gas extraction; electric power generation, transmission and distribution; natural gas distribution; steam and air-conditioning supply; manufacturing; and pipeline transportation of natural gas. Emitters subject to the regulation with annual GHG emissions at or over the threshold of 25,000 metric tonnes CO2 equivalent will have a general obligation to “cover” their emissions in order to meet their emissions cap or reduction target. Thus, starting in 2013, the operators of about 100 establishments, mainly in the industrial and electricity sectors, whose annual GHG emissions are 25,000 metric tonnes CO2 eq. will be subject to a cap and will have to reduce their GHG emissions.

How will emitters and participants register?

To register for the cap-and-trade system, the enterprises concerned must provide the Minister with certain information no later than September 1, 2012. Any person other than an emitter who wishes to participate in the system must also provide information to the Minister. If the application meets the regulation’s requirements, the Minister will assign an identification number to the emitter or participant and will open an account in which emission allowances to cover the emitter’s GHG emissions will be recorded.

Compliance periods

There will be three compliance periods, 2013 2014, 2015 2017 and 2018 2020. The first compliance period will last two years and the other two periods will last three years each. These compliance periods will be preceded by a transition year during which no reduction targets will be set, to allow emitters and participants to familiarize themselves with the system. It is not clear, however, whether emitters will be free from all obligations during this transition period.

How will the cap-and-trade system work?

According to the draft regulation, capping of GHG emissions will commence on January 1, 2013. The system will consist of two stages (1) the reporting of GHG emissions by emitters subject to the regulation, and (2) the surrender to the government of emission allowances. At the compliance deadline following a compliance period, emitters will have to surrender to the government a number of GHG emission allowances equivalent to their total verified GHG emissions reported for the relevant compliance period. Most emitters will receive emission units from the government at no charge, which will make up a large part of their GHG emission allowances. They will have to cover any remaining emissions by purchasing units auctioned off by the Minister or, by private agreement, from another registered emitter. Emitters will also be able to use offset credits equivalent to 8% of their emissions and may be eligible to receive early reduction credits, subject to conditions set out in the draft regulation.

If an emitter has not covered its GHG emissions at the compliance deadline, it will be liable to make up the missing allowances, to the suspension of its account and to administrative sanctions consisting in the deduction of three emission units for each missing emission allowance needed to complete the coverage, as well as to a fine.

Starting with the second compliance period commencing on January 1, 2015, the cap-and-trade system will also apply to GHG emissions from the combustion of fossil fuels used in the transportation and construction industries. From that date, the operators of enterprises that import into or distribute in Quebec fuels whose combustion produces annual GHG emissions at or over the annual threshold of 25,000 metric tonnes CO2 eq., will also be subject to the cap-and-trade system.

Administrative sanctions

The draft regulation provides for fines of between $25,000 and $250,000 for any enterprise that commits an offence under the cap-and-trade system, including for not covering its emissions. An enterprise that fails to provide information or documents required under the draft regulation will be liable to a fine of between $5,000 and $50,000, with fines being doubled for repeat offences.

What's next?

Anyone who wishes to submit comments on the draft regulation must do so in writing within 60 days of its publication. The regulation is expected to come into force on January 1, 2012. However, as most of the partner states and provinces of the WCI have indicated that they will not participate in the common cap-and-trade system at that date, it is possible that the Government of Quebec will revise its position.

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